Arizona’s medical marijuana market is one of the largest in the nation as well as one of the hottest, with costs to break into the market skyrocketing and investors scouring the state for potential opportunities.

Prices have increased because investors see a market where:

The amount of medical marijuana sold has more than doubled from 5,012 pounds in August 2016 to 10,826 pounds in August 2018, according to the Arizona Department of Health Services. The patient count during that period has surged from 105,076 to 178,257.

Arizona has issued all its available marijuana business licenses.

Recreational cannabis could be on the horizon. A campaign to put an adult-use initiative on the ballot in Arizona failed this year, but industry experts expect the issue to be voted on in 2020.

Those kinds of potentials have out-of-state investors eyeing Arizona’s market despite high entry costs and a recent state Court of Appeals decision that cannabis extracts are illegal.

Investors, for example, are putting their dollars into management companies that oversee existing medical cannabis businesses as well as lending MMJ companies money.

“I haven’t seen things slow down at all – it’s extremely active,” said Laura Bianchi, director of Rose Law Group’s medical marijuana practice group in Scottsdale.

Case in point: In July, Acreage Holdings CEO Kevin Murphy said the multistate, vertically integrated cannabis company was “keenly focused” on expanding to states with strong marijuana markets. He pinpointed Nevada, which offers recreational and medical sales, as well as MMJ markets Michigan and Arizona.

Arizona’s medical cannabis sales could range from $425 million to $475 million this year, up from an estimated $325 million-$375 million in 2017, according to the Marijuana Business Factbook 2018.

Here are several factors you need to know about the MMJ market in the state:

1. The price to enter is high.

Each situation is different, but “in general terms, prices (to buy into the Arizona market) probably have quadrupled in just the past two years,” said Janet Jackim, an attorney with Sacks Tierney, an Arizona law firm that handles cannabis transactions.

Strong growth, plus the lack of new licenses, has enabled MMJ businesses to generate annual revenues in the seven figures, according to the Marijuana Business Factbook.

One example of an out-of-state company investment is Canadian-based MPX Bioceutical, which acquired Arizona MMJ assets for a total of 62.6 million Canadian dollars ($48 million) in cash, stock and debt in two separate transactions in 2017 and 2018, according to a Canadian regulatory filing.

In an April news release, MPX said that its annualized revenue run rate from its Arizona operations – which include dispensaries as well as cultivation and processing facilities – had reached more than $45 million.

2. Court decisions could potentially put a chill on the industry.

In late June, Arizona’s Court of Appeals ruled 2-1 that cannabis extracts are illegal.

The ruling, in connection with a 2013 criminal case, was based on an Arizona law that makes it illegal to possess the resin extracted from marijuana.

Cannabis extracts, such as concentrates and infused products, account for more than 40% of MMJ sales in Arizona, so the ruling – if it stands – could have a huge impact on the market, Mikel Weisser, executive director of the state’s NORML chapter, told Marijuana Business Daily.

The case is being appealed to the Arizona Supreme Court.

“When it first happened, there was a huge flare-up for four days,” Bianchi said. “All the naysayers thought the industry was sunk and that everyone (who continued to sell cannabis extracts) would be arrested.”

The state hasn’t offered specific guidance on the court decision.

Dispensaries across the state appear to be continuing to sell extracts.

Health department spokeswoman Nicole Capone wrote in an email to MJBizDaily that the agency’s legal counsel will determine whether any changes to the Medical Marijuana Act are necessary once the state’s high court weighs in.

Jackim and Bianchi both noted the cannabis extract issue is a concern but hasn’t had a big impact on investor interest.

But Jackim did say investors want provisions to protect themselves if extracts are banned.

The state’s 130 dispensaries must grow their own marijuana, but can transfer excess product to another licensed dispensary.

Capone wrote that each licensee must submit an annual financial statement and audited report to the state showing it is operating on a not-for-profit basis.

The health department may perform random audits or ask for supplemental information to ensure compliance, she added.

The twist? Many of the MMJ establishments are run by for-profit management companies, and those aren’t regulated by the health department.

Bianchi said she advises her clients to pay “reasonable” fees and salaries to the companies managing the not-for-profit medical marijuana facilities. “It can’t be a sham where they’re trying to pull profits out of the (not-for-profit),” she said.

4. Here’s how investors are gaining a foothold.

Jackim said investors are entering the market by:

Acquiring or buying a stake in medical marijuana management companies.

Loaning or investing money so MMJ businesses can expand or pay off debt.

Prices depend on the condition of the assets. A good management company with a dispensary or two, a cultivation facility and real estate owned free and clear costs upwards of $10 million, Jackim reported.

One of MPX’s deals gives the company 5% of sales and a large percentage of the net revenues of the licensee, according to a recent regulatory filing. In that deal, MPX has a 20-year management agreement, with options to renew for two additional 20-year terms.

“I think the whole point is to get into (the market) now,” Jackim said of investor interest in general. “Investors see what’s happening across the country, and they’re expecting rec-use legalization in 2020.”